A FACTOR ANALYTIC STUDY OF THE PERCEIVEOCAUSES OF SMALL BUSINESS FAILURE*by LiiAnn Ricketts Gaskill, Howard E. Van Auken, and Ronald A. Manning

The important role of small business inthe U.S. economy suggests that an un-derstanding of why firms fail (and aresuccessful) is crucial to the stability andhealth of the U.S. economy. Robinsonand Pearce (1984) recognized a growinginterest, statewide and on the federallevel, in identifying factors associatedwith the conduct and performance ofsmall firms. An understanding of suchfactors would enable public policyma-kers and small business advisors to bet-ter serve the small business sector.Cochran (1981) suggests that research onbusiness failure for subgroups of thesmall business sector would prove use-ful, and that research on business fail-ures for specific industries in regionsmight be more useful than studies thatare national in scope.

Consistent with the advantages citedby Robinson and Pearce (1984), andCochran (1981), the focus of this study islimited to a single industry within oneregion of the country. An analysis of thedistribution of the total U.S. small busi-

•This research was funded in part by the Iowa Small Busi-ness Development Center and Iowa State University Cooper-ative Extension (Rural Development).

Dr. Gaskill is an associate professor in the Department ofTfextiles and Clothing at Iowa State University. Her researchinterests are in the areas of apparel and accessory merchan-dising, small business apparei retail management, small busi-ness failure, and rural retailing.

Dr. Van Auken is an associate professor of finance at IowaState University. His research interests are in the areas ofsmall business finance, finance issues, and entre-preneurship.

Mr. Manning is the state director of Iowa Small BusinessDevelopment Centers.

ness population identified retail trade asthe largest sector of the small businessindustry {Handbook of Small BusinessData 1988). In terms of specified kindsof retail businesses, the most currentCensus of Retail Trade for Iowa (1982)lists apparel and accessory stores as themost numerous types of retail establish-ments. This article, therefore, presentsthe results of a sfudy that examined per-ceived causes of small business faUure inthe apparel and accessory retailing in-dustry. Such research would be useful inidentifying practices to be avoided andin aiding educators, consultants, andsmaU business support agencies in meet-ing the needs of the small businesscommunity.

REVIEW OF THE LITERATURERecognizing the dynamic relationship

between the firm and its operating andenvironmental characteristics,' Keatsand Bracker (1988) proposed a concep-tual model of small firm performance.This model suggests that performanceoutcomes are a function of many varia-bles, including individual owner charac-teristics, owner behaviors, andenvironmental influences. Their model,grounded in strategic, entre-preneurship, and organizational theory,transcends the belief that small firmsare merely miniature versions of largebusinesses and recognizes small firms asunique entities.

18 Journal of Small Business Management

, According to Keats and Bracker(1988), small firm performance is influ-enced by multiple constructs whichhave been labeled as "EntrepreneurialIntensity" (entrepreneurial characteris-tics and behaviors which differentiateentrepreneurs from other individuals);'"Iksk Motivation" (intensity of entre-preneurial motivation to attain goalachievement); "Perceived Strength ofEnvironmental Influences" (strategicchoices and reactions in response to en-vironmental elements); "BehavioralStrategic Sophistication" (acquisitionand implementation of sophisticatedstrategic management practices); "Cog-nitive Strategic Sophistication" (com-prehension and integration of strategicmanagement practices); and "Tiisk Envi-ronment Factors" (structure of the in-dustry in which the organizationoperates). These six constructs havebeen proposed as substantial influencesof small firm performance outcomes.Performance outcomes in the Keats andBracker model includes a number of in-terpretations and measures including fi-nancial performance. The Keats andBracker model is meant to provide a ba-sis for explaining how owner character-istics, behaviors, and contextual factorsrelate to small firm performance.

Small firm performance has been stud-ied from a variety of approaches to bet-ter understand why some firms fail andwhy others succeed. Weitzel andJonsson (1989) discuss business failuresas being the last stage of an organiza-tion's life cycle. Organizational decline,leading to failure, is characterized bymanagers who have become reaction-ary. The result is inadequate or non-existent planning and inefficientdecision-making. One of the earliest em-pirical studies (Larson and Clute 1979)examined the role of various owner andfirm characteristics to explain businessfailures. The numerous characteristicsshared by failed firms are directly re-

lated to personal decision-based charac-teristics of the owner (lack of insight,inflexibility, emphasis on technicalskills, etc.), managerial deficiencies(lack of management skills and appropri-ate managerial training, etc.) and finan-cial shortcomings (no accountingbackground, cash flow analysis, finan-cial records, etc.). In contrast. Star andMassel (1981) tied failure rates to thetype of business. Failure rates werehigher for firms that (1) were smaller insize, (2) were located in rural areas, (3)sold low priced merchandise, and (4) op-erated as sole proprietorships.

Peterson, Kozmetsky, and Ridgway(1983) provide supporting evidence forthese reasons. Their survey, which askedexisting firms why businesses failed,found that lack of management exper-tise and financial-related factors weremost cited. Wichmann (1983) reportedthat accounting and management capa-bilities were important attributes affect-ing small business success and failure.Boardman, Bartley, and Ratliff (1981) re-ported that rapidly growing firms oftenfail due to the financial stress of thegrowth. For example, the rapidly grow-ing but failed firm had increasing salesconcurrent with higher cost of goodssold, greater debt, and smaller profitmargins. The important relationship be-tween financial distress and bankruptcywas recognized early by Beaver (1968)and Altman (1968). Numerous studies,including recent studies by Gentry,Newbold, and Whitford (1987), GUbert,Krishnagopal, and Schwartz (1990),Laitinen (1991), and Thomas and Evan-son (1987) have continued to emphasizethe importance of following a firm's fi-nancial performance to recognize im-pending bankruptcy.

O'Neill and Duker (1986) examined therole of managerial quality and foundthat failed firms have greater debt loads,relied less on the advice of accountantsand offered more inferior products than

October 1993 19

did surviving firms. Dekimpe and Morri-son (1991) examined the life expectancyof retail stores and found that appropri-ate management training programs anda supportive atmosphere can increasethe duration of a firm's existence.

O'Neill and Duker (1986) also foundmany respondents cited governmentand government-related policies as be-ing an important factor affecting busi-ness failures. The impact of the federalgovernment and its policies were alsofound to affect failure rates in studies byEdmunds (1979) and Clute and Garman(1980). Edmunds found that failure rateswere increased due to the heavy burdenof taxation and regulation, while Cluteand Garman identified the growth inmoney supply (higher growth decreasedthe failure rate) and the volume of banklending (higher volume of bank lendingreduced the rate of business failures) assignificant factors.

A summary of much of the research onsmall business failures is reported byHaswell and Holmes (1989). They reportmanagerial inadequacy, incompetence,inefficiency, inexperience, etc., to be aconsistent theme explaining small busi-ness failures. Many aspects of poor man-agement are reported to be connected toseveral related issues such as poor finan-cial conditions, inadequate accountingrecords, limited access to necessary in-formation, and lack of good managerialadvice.

Many factors that are used to explainsmall business failures also appear asfactors affecting small business success.While the objective of this article is notto examine factors affecting success, it isimportant to recognize the relationshipbetween factors affecting success andfailure. Studies by Hofer and Sandberg(1987), Ibrahim and Goodwin (1986),Lumpkin and Ireland (1988), Montagno,Kuratko, and Scarcella (1986), and Sus-bauer and Baker (1989) consistently de-termine and discuss the importance of

managerial planning, managerial skill,development, and financial planning inrelation to a firm's success. The studiesalso highlight the critical importance ofthe characteristics of the entrepreneurin determining the success of thebusiness.

The results of previous studies havesuggested that a large number of factorscontribute to small firm failure. How-ever, the quantity and variety of factorsidentified in the small business failureliterature results in fragmented find-ings. This study is designed to present amore comprehensive analysis of smallbusiness failure by consolidating manyof the previous research findings into asingular study that addresses opera-tional aspects of the business which maybe contributing to business perform-ance. Although the previous studies donot provide a comprehensive or unifiedexplanation for small firm failure, sev-eral common themes are evident. Whilethese common themes may be describedas being independent, the factors foundto be related to failure should be recog-nized as being interrelated. For exam-ple, poor management skills may resultin poor financial and asset allocation de-cisions, which may lead to financial dis-tress and failure.

Poor managerial skills have commonlybeen associated with firm failure.Weitzel and Jonsson (1991) describe cri-ses management and lack of planning asone of the last stages prior to failure.Haswell and Holmes (1989) report poormanagement as a common theme in thesmall firm failure literature. Numerousother earlier studies (Peterson, Koz-metsky, and Ridgway 1983; Wichmann1983; O'Neill and Duker 1986) have pro-vided similar evidence.

Another common theme emergingfrom the previous research is the impor-tant relationship between financial dis-tress and failed firms. Financial-relatedfactors, commonly measured by finan-

20 Journal of Small Business Management

.cial ratios, were early used as predictorsof bankruptcy (see, for example. Beaver1968; Altman 1968). Other studies haveidentified financial distress factors asbeing strongly associated with businessfailure (Peterson, Kozmetsky, and Ridg-way 1983; Wichmann 1983; Haswell andHolmes 1989). A factor closely related tofinancial distress, rapid growth, and theassociated resulting financial con-straints, have been recognized as oftenleading to financial distress and failure(Boardman, Bartley, and Ratliff 1981;Brigham and Gapenski 1991).

Several studies have suggested thatthe firm's inability to compete in themarket results in failure. Star and Massel(1981), and O'Neill and Duker (1986) as-sociate internal factors, such as smallsize, poor location, and cheap merchan-dise, as being related to failure. Earlierstudies (Clute and Garman 1980,Edmunds 1979) cited government poli-cies as having an important impact on afirm's ability to operate in the market-place.

PURPOSE OF THE STUDYThe primary purpose of this research

was to identify those factors perceivedto contribute to the failure of small busi-ness apparel and accessory retailers inIowa. More specifically, the questionposed based on the literature review is:

Will discontinued small business appareland accessory retailers perceive causes oftheir business failure to relate to commonfailure themes of poor managerial skills, fi-nancially oriented problems, and inabilityto compete in the market place?

In addition, Keats and Bracker's (1988)conceptual model of small firm perform-ance will be applied in an explahatorycapacity to determine its usefulness inidentifying factors that contribute tosmall business failure.' A major contri-

bution of this study is an intensive anal-ysis of small business failure in aspecialized industry. Such an analysis isbeneficial in that it allows for a mini-mum of extraneous factors that mightinfluence the results. This study alsocontributes to the small business litera-ture by offering a timely and currentanalysis of small business faUure duringthe late 1980s and early 1990s. An in-creased awareness of perceived businessfailure causes during this dynamic eco-nomic time period may result in a betterunderstanding of the challenges and dif-ficulties small business owners face dur-ing lean economic periods.

SAMPLE AND METHODOLOGYSelection of the Sample

The sample consisted of previous smallbusiness owners who experienced busi-ness failure in apparel and accessory re-tailing between 1987 and 1991. For thepurpose of this study, business failurewas defined as wanting or needing tosell or liquidate to avoid losses or to payoff creditors or general inability to makea profitable go of the business.

Two methods were used to identifythe sample since no listings of past busi-nesses were available in the state. TheIowa Department of Revenue sales taxpermit tapes were used to identify busi-ness discontinuances between 1987 and1988. Standard Industrial Classification(SIC) code numbers offered a means ofidentifying businesses with apparel andaccessory product lines.'' This process re-sulted in the location of 110 previousbusiness owners.

An alternative source of business dis-continuance was necessary since the De-partment of Revenue tapes did notcontain information on business discon-

'In accordance with the U.S. Small Business Administra-tion, small business in retailing was defined as a retail storehaving fewer than 100 employees.

^Standard Industrial Classification Codes included in thisstudy were SIC #6611 {Men's and Boy's Clothing and Acces-sory Stores), SIC #5621 (Women's Clothing Stores), SIC #5632(Women's Accessory and Specialty Stores), SIC #5641 (Chil-dren's and Infant's Wear Clothing), SIC #5651 (Family Cloth-ing Stores), SIC #5661 (Shoe Stores), and SIC #5699 (Misc.Apparel and Accessory Stores).

October 1993 21

tinuance from 1988 to 1991. Throughlistings in the World Chamber of Com-merce Directory (1990), letters weresent to all of the 181 chamber of com-merce directors in Iowa asking for thenames and addresses of all local appareland accessory retail businesses thatwere discontinued between 1988 and1991. Of the 181 chamber of commercedirectors, 158 (87.3 percent) identified135 past business owners. Therefore,the total sample consisted of 245 appareland accessory small business ownerswho discontinued operation between1987 and 1991.

An attempt was made to contact eachof the 245 business owners to verify thattheir business had been discontinued

X and that the discontinuance was due tofinancial failure. Of the 245 businesses,40 were ineligible (still in operation,nonclothing/accessory business, neverin business, etc.), 15 could not be lo-cated by telephone (no forwarding ad-dress, out of state, in prison, etc.), and 8individuals declined to participate in thestudy.

Of the remaining 182 previous busi-nesses, 130 (71.4 percent) were discon-tinued due to financial difficulties(selling or liquidating to avoid losses,selling or liquidating to pay off creditors,or failure to make a profit) and 52 (28.6percent) were discontinued as a result ofpersonal reasons (health, retirement,personality conflicts, selling business fora profit, etc.).

A questionnaire was sent to each ofthe 130 small businesses that were iden-tified as being discontinued due to fi-nancial reasons. A modified version ofDillman's Tbtal Design Method (1978)was used in the survey methodology.Ninety-one of the 130 small businessesresponded with completed and usablequestionnaires, providing a responserate of 70 percent.

InstrumentsThe research instruments included tel-

ephone interviews and mailed question-naires incorporating open-ended,closed-ended, and forced choice items.The purpose of the telephone interviewwas to identify those businesses failingdue to financial reasons. Mailed ques-tionnaires were sent to businesses indi-cating financial business failure. Boththe telephone interview schedule andmail questionnaire were original instru-ments developed from a review of theliterature and through consultationswith other researchers in textiles andclothing, marketing, economics, andmanagement. Current business ownersand small business consultants in ap-parel and accessory retailing were alsoused in developing and validating the in-struments. Instruments were pretestedwith past small business owners. Modifi-cations were made in content and lengthbased on the pretest results.

The questionnaire was divided intotwo segments. One segment of the ques-tionnaire addressed the small businessowners' perception of business discon-tinuance. The previous small businessowners who indicated discontinuancedue to financial failures were asked torespond to a randomly ordered listing of35 items associated with business faU-ure. These items, cited in the literatureas being related to business failure, in-cluded: lack of a specific target market,poor business site location, failure togenerate a long-term business plan, per-sonal problems, high operating ex-penses, etc. (Appendix A has a completelisting of the items and their literaturesources). Each item in the questionnairewas accompanied by a Likert-type scaleallowing perceived indication of the ex-tent to which the item contributed tothe business failure. The Likert-typescale ranged from 1 (to a very little ex-tent) to 5 (to a very great extent). Re-

22 Journal of Small Business Management

- sponses to this measure were based onperceptions of the past business owners;no attempt was made by the researchersto independently validate these percep-tions. In the second segment of the ques-tionnaire, demographic data werecollected on gender, age, marital andemployment status, educational level,total current household income, type ofbusiness ownership, and years in busi-ness prior to discontinuance.

Data AnalysisFactor analysis was used in an explor-

atory manner to analyze and summarizethe interrelationships among businessfailure variables. The intent was to iden-tify subsets of the original 35 variablesthat were highly interrelated. Since thenumber of subjects per measured varia-ble was small in the original data set, theexploratory analysis must be interpretedtentatively. Although even this subject-to-item ratio would be low if our objec-tive had been formal statisticalinference about parameter estimates,such a confirmatory analysis was notour main objective.

An initial factor analysis was run withall 35 variables. The first factor analysisidentified six factors, but interpretationwas not clear. Therefore, the 19 varia-bles loading greater than .45 on the orig-inal six factors were analyzed separatelyin a second factor analysis. The reasonwas to remove some of the "noise"added by variation due to extraneousvariables. Variables with loadingsgreater than .45 on one of the originalsix factors with associated eigenvaluesgreater than 1.0 were selected for use infurther analysis. A final factor analysiswas completed using the resulting 19variables. Four factors (those witheigenvalues greater than 1.0) were re-tained and used to identify groupings ofitems representative of business failure.Variables with high loadings (greaterthan .45) were considered to be repre-

sentative of the characteristic reflectedby that factor. Orthogonal factor rota-tion was used in the analysis since theidentification of a distinctive cluster ofvariables was desired.

RESULTS AND DISCUSSIONSample Demographics

Eighty-four (64.6 percent) of the pastsmall business owners were female and46 (35.4 percent) were male. Respon-dents ranged in age from 21 to 72 withages 41-50 being the largest group (28.3percent), and 114 (88.4 percent) weremarried. Some college or technical train-ing beyond high school was reported by47 (36.4 percent) of the participants.Forty-four past business owners (34.1percent) were high school graduates,and 26 (20.2 percent) had graduatedfrom college. The largest percentage(56.6 percent) were presently employedfull-time while 20 participants (15.5 per-cent) reported a part-time employmentstatus. Over half (56.6 percent) werepresently in a two-income household.Total household income ranged from lessthan $15,000 annually to more than$75,000 annually. The largest percent(37.4 percent) of the past business own-ers reported a household income in the$15,000 to $30,000 range.

The majority of the participants (59.4percent) were sole owners of their pastbusinesses. Sixty-nine (54.3 percent)had started their own business while 55(43.4 percent) had bought a previouslyexisting business. Over 60 percent of thebusiness owners had no previous experi-ence with small business ownership. Theamount of money lost due to the busi-ness failure ranged from less than $5,000to over $20,000. Forty-five percent ofthe respondents declined to indicate theamount of money lost. The largest per-centage (47.2 percent) of those who re-sponded to the question reportedfinancial loss in excess of $20,000.Ninety-four (76.4 percent) of the past

October 1993 23

business owners were not currently op-erating a small business establishment.Over 90 percent had no intention of everoperating another small business inIowa.

Factor Analysis Results of SmallBusiness Failure

Responses to the business failuremeasure were analyzed by principalcomponent factor analysis with ortho-gonal rotation. Four factors, accountingfor 64.5 percent of the variance ex-plained, were used in this study. Rotatedfactor loadings, communality (actualvariance explained by each variable)and content of the factors are in table 1along with eigenvalues, variance ex-plained, and factor means.

The factor analysis extracted four fac-tors (19 items) with item loadings rang-ing from .51 to .85. Eleven items wereidentified under Factor 1 with loadingsranging from .82 to .51. An analysis ofthese statements were interpreted asitems related to managerial and plan-ning functions (Cronbach's alpha = .92).Specific items loading on Factor 1 in-cluded: inadequate knowledge of pric-ing strategies; failure to generate along-term business plan; ineffective ad-vertising/promotional strategy; lack ofmanagerial experience, skills, and train-ing; failure to generate a personnel plan;failure to generate a merchandise assort-ment plan; lack of experience in theproduct line; inflexible decision-making;lack of knowledge of current businessliterature; poor use of outside advisors;and ineffective interior store layoutpattern.

Managerial and planning functions ofthe firm are comprehensive and includealmost every aspect of the business. Thisis evident from the items in Factor 1which include pricing, business plan-ning, advertising, and promotion, mana-gerial skills, personnel, product and

merchandise, etc. The importance of -managerial and planning skills has beena commonly discussed issue related tothe performance and the failure/successof the small firm. Managerial effective-ness influences every aspect of a busi-ness and is often believed to be the mostimportant factor contributing to smallbusiness failure. Haswell and Holmes(1989) reference several studies whichshow that managerial inadequacy is theprimary cause of small business failures.Larson and Clute (1979) and Wichmann(1983) discuss at length the importanceof managerial skills for the success ofthe firm.

Factor 2 identified factor loadingsranging from .74 to .58 (Cronbach's al-pha = .71). These items related to ven-dor relations included: poor relationswith vendors; difficulties in receivingmerchandise; and inadequate financialaccounting or record keeping.

Working capital management is re-lated to the day-to-day operations of thefirm. Many activities of the firm are re-lated to working capital management in-cluding poor vendor relations (part ofworking capital management) which hasa direct impact on the 'viability of thefirm. If the firm is unable to obtain mer-chandise due to poor vendor relation-ships then customers may patronizecompetitors. Poor record keeping canalso lead to strained relationships withvendors which may result in difficulty inobtaining and receiving merchandise.Inadequate working capital decisionsand accounting information have beenreferenced consistently as causes ofsmall business failure. Researchers(Haswell and Holmes 1989, Larson andClute 1979, O'Neill and Duker 1986,Wichmann 1983) discuss the impact ofpoor working capital management, in-sufficient accounting information, andthe resulting inadequate financial con-trol on the firm's operations. Ineffectivedecision-making relative to these varia-

24 Journal of Small Business Management

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October 1993 25

bles can also be attributed to poor mana-gerial and planning skills.

Factor 3 addressed the competitive en-vironment. Specific items were: compe-tition from discount stores; inability tocompete in trading area; and failure tooffer saleable merchandise assortments.Factor loadings ranged from .61 to .85(Cronbach's alpha = .69).

The variables included under competi-tive environment are directly related tothe ability of the small firm to success-fully operate and compete in its environ-ment. Two factor items, competitionfrom discount stores and inability tocompete in the trading area, affect theability of the firm to be successfulagainst market competitors of aU sizesand types. One reason that the firm isunable to compete in its market areamay be that merchandise is not salableor competitive in comparison to otherfirms in the market. The impact of thecompetitive environment is also a fre-quent theme that has been found tocause small firm failures. Star and Mas-sel (1981) discuss how various aspects ofthe firm's environment affect firm per-formance. The importance of high qual-ity services and products is consistentlycited as a component of successful firms(Hofer and Sandberg 1987). These varia-bles are also closely related to manage-rial effectiveness and planning sinceinabUity to compete and merchandiseoffered are a direct consequence ofmanagement decisions.

Factor 4 identified two items whichappeared to be related to growth andoverexpansion. Items were prematurebusiness growth/overextension and in-ventory difficulties. Factor loadingswere .82 and .61 (Cronbach's alpha =.57). The researchers recognize that reli-ability on Factor 4 was low, but becauseitems were conceptually related theywere included in the study results.

Growth and overexpansion are oftencited as sources of a small firm's finan-

cial distress (Brigham and Gapenski1991). Inventory difficulties are directlyrelated to rapid growth, since growingfirms must acquire and finance the in-ventory prior to the sale of goods.Growth constraints and the financialconsequences of rapid growth and/oroverexpansion have been discussed asrelated to small firm performance andsuccess. Rapid expansion often leads tocapital shortages, financial distress,and, ultimately, failure. Blue, Cheat-ham, and Rushing (1989) discuss thefirm's increased financial risk exposureand increased likelihood of failure ateach stage of expansion.

Several items were eliminated fromthe study due to low factor loadings, in-cluding areas related to merchandising(sales planning), marketing (lack of aspecific target market, site location,training of sales personnel), financial-related items (inadequate sales level,high operating expenses, undercapitali-zation, poor cash flow management, ex-penses, fixed assets) and those itemsbeyond the control of the firm (hightaxes, high interest rates, federal regula-tions, poor economic conditions, andfraud/disaster). Several of these itemshave been previously cited as being im-portant factors contributing to failure. Itis possible that during expansionary per-iods, such as the period of time whenfirms in this study would have failed,financial-related items and the burdenof those factors which are beyond thecontrol of the firm become less impor-tant contributors to failure. These itemsmay be more important during periodsof economic distress.

IMPLICATIONS FOR THEORY ON SMALLFIRM PERFORMANCE

This study found that perceived fail-ure factors of discontinued small busi-ness apparel and accessory retailersclustered in four areas. Consistent withthe findings of Haswell and Holmes

26 Journal of Small Business Management

(1989), poor managerial functions (Fac-' tor 1) surfaced as a failure factor. These

findings also support the work of Larsonand Clute (1979), Peterson, Kozmetsky,and Ridgway (1983), and Wichmann(1983). Keats and Bracker (1988) pro-posed that the abUity to comprehendand integrate strategic managementpractices is contingent upon the processof cognitive development, whichevolves through a series of stages thatare dependent upon environmentalchallenges and individual responses.This concept is closely related toFactor 1 (managerial and planning func-tions). Having adequate skills is criticalfor the owner to process informationand make decisions relative to the varia-bles that are part of Factor 1. Accordingto Keats and Bracker, the "neophyteentrepreneur at a very early stage ofcognitive strategic sophistication wouldnot be prepared to comprehend and em-ploy sophisticated management con-cepts and techniques. . ." (1988, 52).Poor decisions are the result of inade-quate decision-making skills, leading tofinancial distress and failure. Factor 1includes the important areas in whichpoor decision skills are present.

The relationship between financialdistress and failure was also prevalent inthis study with working capital manage-ment (Factor 2) and growth and overex-pansion (Factor 4) surfacing as failurefactors similar to pre'vious research find-ings (Boardman, Bartley, and Ratliff1981; Brigham and Gapenski 1991; Has-weU and Holmes 1989; Wichmann 1983).The third factor, related to the competi-tive environment, emerged through dif-ficulties in competing with discountstores and competition in trade areas.These findings are consistent with theresearch of Edmunds (1979), Larson andClute (1979), and Peterson, Kozmetsky,and Ridgway (1983). Keats and Bracker's(1988) "behavioral strategic sophistica-tion" refers to the ability of the firm to

actually engage in planning. Evidence ispresented suggesting that a positive re-lationship exists between the amount ofplanning which the firm undertakes andits financial performance. This conceptis closely related to Factor 2 (workingcapital management). Factor 3 (compet-itive environment), and Factor 4(growth and overexpansion). Withoutgood planning, the firm's performancedeteriorates in many areas. The abilityof the firm to successfully competeagainst competitors, to target marketniches, and to offer saleable goods arepart of the business planning process.Good planning is essential prior togrowth to ensure that growth demandsdo not lead to financial distress. Factors2, 3, and 4 are also closely related toKeats and Bracker's concept of "per-ceived strength of environmental influ-ences," or the perceived degree towhich owners believe they can predict,control, and influence their environ-ment. Keats and Bracker contend thatowners who believe they have a highlevel of influence over the critical as-pects of the environment do not per-ceive high levels of risk in the business.The results may be poor managerialplanning reflected in inattentiveness toworking capital concerns, inadequateresponses to competitors and customers,and poor planning prior to engaging in agrowth strategy.

WhUe these factors offer insight intoareas perceived to contribute to busi-ness failure, they also are useful in aid-ing in the identification of researchquestions yet to be answered. An analy-sis of the planning functions in Factor 1suggest that failed business owners maynot have engaged in the operational andstrategic planning process resulting indeficiencies in personnel, inventory,marketing, and financial planning. Fur-ther research is needed to determine ifsignificant differences do exist in the op-erational and strategic planning func-

October 1993 27

tions between successful and failedsmall business retailers.

Items in Factor 1 also suggest thatvoids exist in the training and skill levelof this select group of retailers. It is pos-sible that limited past experiences haveresulted in voids in the technical andmanagerial skills necessary for effectivebusiness operation in that over half ofthe study participants reported no pre-vious experience with small businessownership. An area for further researchis the extent to which past business ex-periences (education, training, work)contribute to business performance.

The external business environment isan area perceived to contribute to busi-ness failure. Items such as "poor rela-tions with vendors," "difficulties inreceiving merchandise," "competitionfrom discount stores," "inability to com-pete in trading area" and "failure to of-fer saleable merchandise assortments"suggest failed small business owners areineffective in functioning in the envi-ronment in which they operated. Ques-tions arise as to the use andeffectiveness of marketing strategies inoperation; strategies for product/servicedifferentiation from competitors includ-ing mass merchants and discount stores;and how small business retailers com-pete in the market for price and productfrom supply sources. Further researchneeds to address external market va-riables/strategies and their impact onsmall business performance.

Recognition also must be given to thecritical role of managing as this functionpermeated throughout the study find-ing; managerial decisions affect theplanning process, finances or workingcapital, responses to the competitive en-vironment, and decisions on growth andexpansion. Insight into effective mana-gerial styles and techniques employedby small business practitioners could befertile ground for analysis.

Study results also aid in the identifica-tion of problematic areas for businessowners which should prove useful tosmall business support agencies, coun-selors, and consultants. Assistanceneeds are warranted in financial man-agement, competition and growth strat-egies, but perhaps, most importantly, inmanagerial planning areas. Training pro-grams and small business support en-deavors need to focus on equippingsmall business practitioners with themanagerial skills necessary for effectivesmall business operation as well as a con-ceptual and cognitive understanding ofhow these functions affect business per-formance. However, while such assist-ance would seemingly prove fruitful forsmall business managers, questions ariseas to whether these outside support sys-tems are being effectively utilized bytheir target audience. The identificationof the perceived failure items "lack ofcurrent business literature" and "pooruse of outside advisors" suggest thatsome faUed small business owners arenot effectively utilizing such supportsystems. Modified marketing and com-munication strategies may bewarranted.

The small business literature acknowl-edges that failure is attributed to manyfactors in the external and internal envi-ronment. This research furthers thefield of study through the identificationof clusters of items or factors whichwere perceived as contributors to failureby those business owers who had actu-ally experienced business discontinu-ance due to financial failure. Manyquestions are still to be resolved andwarrant additional exploration into thesmall business environment. In order tofurther advance our insight into smallbusiness failure, comparisons areneeded between successful and failedsmall business owners, although recog-nition is given to the difficulties in-volved in obtaining usable samples from

28 Journal of Small Business Management

the small business failure population.Further researchers also need to studydiffering segments of the small businesspopulation to determine if similar find-ings emerge. Studying the effects ofbusiness failure factors related to thefirm's characteristics could also prove in-sightful. This research needs to be dupli-cated in other geographic areas todetermine the generalizability of thestudy results. Such insight and addi-tional research efforts will be useful inthe potential evolvement and develop-ment of a theory of small businessfailure.

While the study results show that ap-parel and accessory small business fail-ures are a result of poor performanceand inefficiencies in four general areas,neither the factors nor the variableswithin each factor should be viewed asbeing independent. The smaU businessfirm operates in a dynamic environmentwhere the effects of poor managerialperformance and changing environmen-tal characteristics permeate throughoutthe organization.

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October 1993 29

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30 Journal of Small Business Management

Appendix A

REFERENCE LIST OF BUSINESS FAILURE MEASURES

STUDIES

ITEMS

Lack of a specific target marketPoor business site locationIneffective interior store layout patternFailure to generate a long-term business planPersonal problems (health, marital, etc.)Ineffective advertising or promotional strategyHigh operating expenses (wages, rent, etc.)High taxesInadequate sales levelInadequate knowledge of pricing strategyUndercapitalization or lack of staying powerInflexible decision makingFailure to devise a merchandise assortment planPremature business growth or overextensionHigh interest ratesInadequate financial accounting record keepingFederal regulationsInability to compete in trading areaLack of managerial experience, skills, & trainingFailure to generate a personnel plan*Poor economic conditionsLack of a formal college educationPoor cash flow controlFraud/disasterLack of knowledge of current business literatureDifficulties in receiving merchandiseExcessive fixed assetsPoor use of outside advisorsLack of experience in the product line*Inventory difficultiesFailure to generate a merchandise sales plan*Poor relationship with vendors*Competition from discount stores*Failure to offer saleable merchandise assortments*Poorly trained sales people*

979

Jte

l

u

X

X

X

X

X

X

X

ids

1979

c3

X

X

X

, C

lute

197

9rs

on

2

XX

X

X

X

XX

XX

X

X

Du

ker1

986

4eill

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X

X

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eta

l. 1

983

11

X

XX

XXX

X

X

ann

198

3

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X

XXX

X

X

X

X

* Based on expert panel input.

October 1993 31